News that OPEC had slightly downgraded its estimate of the pace of recovery in global oil markets this year was met with glee by the doom-mongers, but it makes little difference to the prognosis for world energy markets.
Demand is recovering apace and — barring no big resurgence or “second wave” — will be approaching something like normality by the end of the year, and improve even further next year as economies reopen. It is a long, slow process but heading in the right direction.
OPEC’s monthly report said that demand for 2020 would be down by 9.06 million barrels per day, slightly more than the 8.95 million it calculated last month, but really that amounts to little more than a rounding error.
It is unlikely to affect calculations or sentiment among the members of OPEC and their allies in the non-OPEC countries as they prepare for next week’s meeting of the joint ministerial monitoring committee (JMMC).
These meetings have become much more important affairs since the historic oil cuts agreed in April that took 9.7 million barrels off the market. Much like the monthly meetings of the US Federal Reserve or the UK’s Bank of England, they have become a means of assessing the market and making any adjustments to policy implementation as required.
Rather than being knocked off course by a meagre 110,000 barrels, the JMMC is likely to be reassured by other, more significant, statistics. The big drawdown in US inventories, the fall in the amount of oil in floating storage and the conturing rise in demand in Asia are the factors that will really determine the recovery of the oil market this year, and the signs are positive on all those.
The message is that global oil markets are well on the way to rebalancing, and the most significant factor in this has been the OPEC+ alliance led by Saudi Arabia and Russia.
Certainly, as OPEC noted, there is a risk of a second hit to the global economy if the coronavirus disease (COVID-19) spikes again this autumn, with signs of such spikes in the US and Europe over the past month.
But globally policymakers seem to have got more of a grip, and are unlikely to shut down whole economies again.
The International Energy Agency (IEA), in its own monthly report, said that it remains unclear whether new COVID-19 cases would herald a second wave, or simply a regular fluctuation of the disease. It looks like we are all going to have to live with it.
Some sectors of the energy market are more vulnerable than others to spikes in virus infections. Gasoline — a big component — is one, and there is the likelihood of hits to drivers’ consumption, especially in the US, as COVID-19 cases rise and fall in different states and regions.
Aviation fuel is another sector that will weigh heavily on the demand side. The IEA said that the outlook for air travel had deteriorated further, and that the total number of kilometers flown around the world was 67 percent down in July year-on-year. Again, that is something we are going to have to live with for many months, even years, to come.
What the JMMC is really about is the supply side of the oil equation, and there the news is decidedly better. Yet another expert agency, the US Energy Information Administration, calculated that global oil oversupply would amount to 1.08 million barrels daily in 2020, significantly down from its previous estimate of 1.7 million and incomparably better than the 20 million-plus estimates from April.
The message is that global oil markets are well on the way to rebalancing, and the most significant factor in this has been the OPEC+ alliance led by Saudi Arabia and Russia. After the big cuts in April, output has been increased by about 1 million barrels per day from the beginning of August, as scheduled. But this planned increase has not really altered the mathematics, nor affected the oil price, with Brent still above $45.
The OPEC+ participants have adhered to the new targets on an unprecedented scale, hitting 97 percent across the organization. Even former laggards such as Iraq and Nigeria have been persuaded of the benefits to be had from adhering to the new OPEC+ regime and — crucially — have agreed detailed schedules to compensate for previous overproduction.
* Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai